Despite being a high saving economy, capital formation may not result in significant increase in output due to
Answer & explanation
Answer: (d) high capital-output ratio
A high capital-output ratio means that a lot of capital is needed to produce each extra unit of output. Even with high saving and investment, growth then stays low because each unit of capital adds little to output.
- ✓ (d) The incremental capital-output ratio (ICOR) links investment to growth: roughly, the investment rate divided by the growth rate. India's Ninth Plan invested more than the Eighth yet grew more slowly, so its ICOR rose from 3.43 to 4.53.
- ✗ (a) Weak administration can hinder projects, but it is not the measure that ties capital formation to output. It shows up through a high capital-output ratio.
- ✗ (b) Illiteracy affects human capital and productivity in general. It is not the standard reason why saving and investment fail to raise output.
- ✗ (c) Population density is a demographic feature, not a measure of how efficiently capital is turned into output.
Remember · Growth = investment rate divided by ICOR. A high capital-output ratio means investment is inefficient, so high saving does not give proportionate output.
Sources
- Planning Commission, Tenth Five Year Plan (2002–07), Vol I, Ch 2 (Internet Archive copy) ↗ “in the Ninth Plan the economy achieved a much lower growth rate of 5.35 per cent despite higher levels of investment … the incremental capital output ratios (ICOR) for the Eighth and Ninth Plans were 3.43 and 4.53 respectively.”
Question and answer: UPSC's official GS Paper I (2018, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·